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ARTNeT Policy Brief No. 26 1

ARTNeT POLICY BRIEF

Patrick Messerlin* Brief No. 26, July 2010

Making climate change and trade mutually supportive

* Patrick Messerlin is a Director, Groupe d’Economie Mondiale at Sciences Po. This brief is based on Messerlin. P. (2010). The technical support

provided by ESCAP and the International Development Research Centre, Canada, during the preparation of this brief is gratefully acknowledged.

The views presented are those of the author and do not necessarily reflect the views of the United Nations, the author’s employer or other ARTNeT

members and partners.

Asia-Pacific Research and Training Network on Trade • www.artnetontrade.org • Tel: +66 2 288 2067 • Email: artnetontrade@un.org

Introduction

A few years ago, the relations between the climate and

trade communities were marked by mutual ignorance at

best, and more often by deep hostility. The climate

community did not want to be hindered by trade

constraints. The trade community was so afraid of the

damage that climate policies could do to the

multilateral trade regime that it was adamantly opposed

to any consideration of such concerns. Mutual

destruction looked inevitable.

Now things are changing. The trade community is

realizing that climate change concerns will be high on

the political agenda for a long time to come. The

climate community is realizing that climate policies will

face fierce opposition from four-fifths of human kind if it

costs too much in terms of growth and of trade, its main

channel.

However, many fears and doubts still abound. The trade

community remains obsessed by the host of putative

conflicts raised by creative trade lawyers, forgetting that

other domains of international trade law are full of

conflicts that have never materialized. The climate

community has not yet fully realized how easy a prey it

is for protectionist interests, at great cost to climate

change goals. For example, the European Commission

(2009) has formulated a list of industries with “significant

risk of carbon leakage” that includes sectors such as

manufacturing of wines, clocks, bicycles and underwear.

These quite surprising outcomes are easy to explain; one

of the criteria used by the European Commission for

drawing up the list is the importance of trade for the

sectors examined. This criterion, driving the selection of

80 per cent of the sectors in the list, has nothing to do

with climate change, but it is honey for protectionist-

minded sectors.

1. Climate and trade communities: So many things
in common

The main ingredient that is still lacking in the climate and

trade debate is full recognition of the many things that

the climate and trade communities have in common.

First, they share a common problem – each has to deal

with a global “public good”. Climate change is a public

good; countries unwilling to contribute to climate

change goals undermine the results of those making

efforts. Freer trade is a public good; its benefits are

bigger and faster to emerge if all the countries move

together.

Second, the two communities have common foes as

illustrated by the above mentioned European Com-

mission list – the firms willing to slow down climate policies

by using protectionism and those willing to slow down

trade liberalization by using climate change excuses.

Third, they have emerging common friends – those firms

willing to grasp the opportunities of delivering goods that

are both cleaner (good for the climate) and cheaper

(good for trade) as well as countries such as Germany or

China are building up comparative advantages in

environmentally-friendly goods.

Last but not least, the world climate regime has to

develop in a multilateral framework, just as the trade

regime did. There is one Earth, but the Copenhagen

Conference has made it clear that no country is ready

to surrender its sovereign rights. The world carbon price

or tax is an objective that should be aimed for, but it will

emerge in a future as distant as worldwide free trade.

The existence of so many fundamental similarities

strongly suggests that the multilateral climate regime

should not be so different from the multilateral trade

regime. In the following paragraphs, it is argued that the

climate community would greatly benefit from adopting

the two key principles of the multilateral trade regime. It

is also argued that benefits go both ways; the climate

community could design some instruments that could be

repatriated in the multilateral trade regime to its upmost

benefit. Mutual support emerges as highly desirable.

2. From the trade community to the climate
community

The climate community should borrow the multilateral

trade regime’s two key principles – “national treatment”

for disciplining carbon border taxes and “most-favoured

nation” for disciplining carbon tariffs.

2 ARTNeT Policy Brief No. 26

ARTNeT POLICY BRIEF

(a) National treatment

The climate community worries about carbon leakage.

Arguably, carbon border taxes (CBTs) are the best

instrument to fight carbon leakage; why would firms

located in a country shift their dirty production to foreign

countries if, once re-imported, their products would pay

the country’s domestic carbon taxes? If CBTs reassure
the climate community, they make the trade community

nervous. The trade community should be reminded that

such a system has been routinely used with great

success by trading partners enforcing very different rates

of value added tax (VAT) during the past four decades.

Thus, there is nothing wrong with CBTs if – this “if” is

crucial – they are properly enforced, as in the VAT case.

This condition requires the principle of national

treatment, which means that a country should impose

the same domestic tax on imported goods and on

similar products produced domestically. Specifically, it

requires the country exporting goods to eliminate its

domestic carbon taxes (if any) on exported products,

while the importing country imposes its own domestic

carbon taxes (if any) on imported products. Evidence

from the European cap-and-trade regime suggests that

carbon taxes in the dirtiest sectors would be equivalent

to VAT rates of 3 per cent to 6 per cent – not insignificant

numbers, but not large ones either.

In this context, it is interesting to estimate the potential

impact of carbon border taxes. The table suggests three

main results. First, clearly, mutual destruction is a

possibility. Trade-based border taxes on imports result in

massive deterioration of the situation – remarkably – of

almost all the countries, to the point of putting at risk

world growth; hence the willingness and/or capacity to

pursue climate change policies. Second, while the

impact of specific-based border taxes may be less

dramatic it hurts most developing countries, ensuring

political international turmoil.

Last but not least, two border tax regimes have a much

lower impact on trade: (a) the two-way border tax

regime; and (b) the ‘no border tax’ regime. The choice

between these two regimes depends largely on whether

or not developed countries want to do practice what

they preach. If one believes what developed countries

preach, they are cutting their carbon emissions for the

sake of human welfare. Their preferred choice should

then be the ‘no border tax’ regime. Developed countries

would accept a small decline of their exports because it

minimizes the decline of the low- and middle-income

developing countries’ exports. The ‘no border tax’

regime thus emerges as the preferable option from

the joint points of view of climate change (the targeted

CO
2
cut is achieved in developed countries) trade and

development; this is mutual support at its best.

(b) Most-favoured nation

Such a principle would ban the imposition of carbon

tariffs on imports from only certain countries, i.e., China,

India or other key emerging economies. It is crucial to

distinguish between carbon tariffs and carbon border

taxes; carbon tariffs do, in fact, discriminate against

some countries, and they are not defined by the level of

domestic carbon taxes. The most-favoured nation

principle should be a pillar of the multilateral climate

regime, because carbon tariffs are totally counter-

productive from a climate perspective for two reasons.

First, they assume that developed countries import most

of their dirty products from developing countries. This is

not the case, because developing countries still export

mostly goods with relatively low carbon intensity, from

clothing to assembled products. Second, carbon tariffs

would generate a “dual” world economy with a slowly

growing trade between clean countries, and a rapidly

growing trade between dirty countries – not precisely

what the climate community would like to promote.

Interestingly, a trade-centred (and selfish) argument

reinforces these two reasons. Assume, for example, that

rich countries impose carbon tariffs on Chinese exports of

dirty products (on the top of CBT). This treatment will

create strong incentives among Chinese firms to

upgrade as quickly as possible those products they want

Estimated impact of alternative border tax regimes on total industrial exports

(Unit: Per cent changes)

Border tax regimes
a

United States EC
Developing

Brazil China India
countriesb

Only on imports (trade-based) -10.1 -23.2 -14.8 1.9 -20.8 -16.0

Only on imports (specific-based) -6.5 -6.6 -3.2 -2.5 -3.4 -3.2

Two-way tax (specific-based) 0.0 0.5 -2.0 -0.6 -1.8 -2.1

No border tax -2.3 -2.1 -0.1 1.0 -0.9 -0.3

Source: Mattoo and others, 2009. Developed countries are assumed to reduce unilaterally their CO
2
emissions by 17 per cent

Note: EC = European Commission.
a Two-way border tax – elimination of the carbon tax imposed by the exporting country combined with the imposition of the carbon tax

imposed by the importing country. Trade-based BT: the specific carbon tax of the importing country is applied on the carbon content of

the exporting country on imports from the developing countries. Specific-based BT: the specific carbon tax of the importing country is

applied on the carbon content of the importing country on imports from the developing countries and specific-based.
b Low- and middle-income developing countries.

ARTNeT Policy Brief No. 26 3

ARTNeT POLICY BRIEF

to export to the rich countries. In other words, carbon

tariffs will accelerate the emergence of Chinese

competitors in the high-end products – exactly as

voluntary export restraints and antidumping measures

accelerated the technological upgrading of Japanese

and Korean products from the 1970s to the 1990s. This is

not exactly what the supporters of carbon tariffs are

hoping for.

3. From the climate to the trade community

What could the climate community teach the trade

community? Of course, this part is more hypothetical
because the climate regime is still a blank page. Clearly,

however, a sound multilateral climate regime could help

the trade community with several crucial aspects.

(a) Better adjustment policies

The multilateral trade regime has failed to put in place

sound instruments for supporting the adjustment efforts

required by changing economic conditions. It relies on

measures such as antidumping or safeguards, which

have been amply proven to be both ineffective (they

do not promote adjustment) and costly to consumers

(and even to the firms triggering such measures). The

same would inevitably happen if the climate community

were to adopt similar instruments for addressing climate

change-related adjustments.

At this stage, the climate community has the opportunity

to design better instruments – be it well-targeted

subsidies, public regulations or self-regulations – for

addressing the adjustment problems to be met by

producers of carbon-intensive products. If successful, the

climate community would have provided a great

service to the trade community, which could then

renovate its own machinery by adopting similar

instruments for trade-related adjustment problems.

(b) Differentiated treatment of developing countries

The climate community has already adopted the notion

of “common but differentiated responsibilities” when

dealing with developing and least developed countries.

This notion echoes the “special and differentiated

treatment” (S&DT) in the multilateral trade regime.

However, S&DT can be best described as a trap for

developing countries; it is not generous when truly

needed, and it is generally designed in such terms that

it generates perverse impacts (if any) on both the

alleged beneficiaries and the developing countries

excluded from its scope.

The main reason for such negatives effects is that the

trade community has been unable to design a sound

mechanism for “graduating” successful developing

countries. The climate community should therefore be

careful not to duplicate such a mistake; instead, if

deemed necessary, it should design sound, predictable

and progressive conditions of the “graduation” of

developing and least developed countries.

(c) Negotiating techniques

A last source of inspiration that the trade community

could draw from climate diplomacy concerns

negotiating techniques. The climate community has

already begun to negotiate on a “plurilateral” basis, that

is, a core of key large countries, with a few more nations

representing well-defined groups of small countries. The

trade community would be well-advised to adopt similar

techniques for concluding the Doha Round.

4. Challenges ahead

Generally speaking, the climate community should feel

at ease within the broad World Trade Organization

principles. If that community wants to have its own

multilateral treaty, it should make sure the treaty is built

on the same basic principles. Meanwhile, the trade

community should grasp the opportunities to benefit

from the improved disciplines that the climate

community could design, in order to address the

systemic current failures of the multilateral trade regime.

That said, although immensely beneficial, mutual support

raises serious challenges because climate change

policies raise huge difficulties in terms of implementation.

The following four issues require particular care.

(a) Defining “similarity” or “likeness”

National treatment means that countries rely on

domestic information – the one they know best. This is a

highly desirable feature. However, it falls short of

providing a workable definition of “similarity” between

(or “likeness” of) foreign and domestic products, and

production processes. Unfortunately, to say the least, the

multilateral trade regime does not provide any firm

guidance on this issue.

As a result, the climate community has a key role to play

in shaping such a definition. It should be very careful not

to be captured by definitions of “similar” that would

favour vested interests to the detriment of climate

change goals. This implies that similarity should be based

on scientific evidence in two ways. First, such evidence

should be the only criterion for defining carbon intensive

sectors. This is a key step for limiting risks of protectionism.

However, it is also a crucial step for the climate

community because it helps to simplify the otherwise

mind-boggling complexity of climate policies, and to

focus on the sectors that are the true source of

problems. Second, scientific evidence should be used to

build “clusters” of production processes considered to

have similar carbon-intensity and thus subject to the

same carbon tax rate.

(b) Taking into account production and process

methods

These two steps are critical for addressing, in a

pragmatic way, the problem of production and process

methods (PPMs). The logic of climate change problems

4 ARTNeT Policy Brief No. 26

ARTNeT POLICY BRIEF

What is ARTNeT? The Asia-Pacific Research and Training Network on Trade (ARTNeT) is an open

regional network of research and academic instiutions specializing in international trade policy

and facilitation issues. Network members currently include over 25 leading national trade

research and academic institutions from as many developing countries from East, South,

and Southeast Asia and the Pacific. IDRC, UNCTAD, UNDP, ESCAP and the WTO, as core

network partners, provide substantive and/or financial support to the network. The Trade

and Investment Division of ESCAP, the regional branch of the United Nations for Asia and

the Pacific, provides the Secretariat of the network and a direct regional link to trade policymakers and other

international organizations.

ARTNeT aims at increasing the amount of policy-oriented trade research in the region by harnessing the

research capacity already available and developing additional capacity through regional team research

projects, enhanced research dissemination mechanisms, increased interactions between trade policymakers

and researchers, and specific capacity-building activities catering to researchers and research institutions from

least developed countries. A key feature of the network’s operation is that its research programme is discussed

and approved on an annual basis during a consultative meeting of policymakers, research institutions and other

stakeholders. For more information, please contact the ARTNeT Secretariat or visit www.artnetontrade.org.

makes it inevitable that PPMs as well as products per se

must be taken into consideration. Two “like” goods

produced by a dirty and a clean production process are

not similar from a climate perspective. This feature makes

the trade community nervous. However, that community

should also recognize that it implicitly takes into account

production processes when it allows the imposition of

different antidumping duties of “like-products” produced

by different firms. The risk is thus not a matter of

principles, but of sound implementation.

If these two steps are not followed, it creates the risk of

denying the notion of likeness. This would hurt the trade

regime. In addition, it would also harm the climate

regime because it would require the impossible task of

managing an enormous number of “products times

processes” that are subject to a host of different carbon

taxes. Developing these two steps based on scientific

evidence is thus a common interest of the climate and

trade communities. Doing so in a multilateral framework

would make the similarity definitions even more

transparent and unbiased.

(c) How to define carbon border taxes?

The way that carbon border taxes will be defined is

crucial for developing countries. Ensuring a level playing

field is not a simple matter in the case of a public good

because it faces two constraints: (a) from an economic

perspective, past emissions have to be taken into

account as well as present and future emissions; and

(b) from a political perspective, the level of taxation

should not harm growth too strongly if worldwide support

is sought. Of the three possible ways of defining carbon

border taxes, the burden on developing countries

could range from one to two or even three taxes,

depending on the definition chosen. Offering the best

outcome from a joint climate, development and trade

perspective requires the definition of border taxes in ad

valorem terms.

(d) Facing the unexpected

This point is based on the implicit assumption of perfect

forecasts in climate change matters. This assumption is

not met at the regional or local level. For example,

available forecasts on more frequent and severe

droughts in certain regions during the coming 20 to

50 years diverge widely, depending on the model

used. An efficient way to address the problems of

increased scarcity of water, and of its unequal

distribution in the world is more trade between water-rich

and/or water-efficient countries and the other countries

– meaning the opening of their agricultural sectors

(which use 70 per cent to 80 per cent of water

resources) by the developed countries. In short, freer

trade emerges as the cheapest source of insurance

against unexpected shocks in climate change.

To conclude, rather than being afraid of each other, the

climate and trade communities should realize how much

they will lose if they do not cooperate, and how much

they will gain if they support each other.

References

European Commission (2009). “Draft Commission Decision

on determining, pursuant to Directive 2003/87/EC of the

European Parliament and of the Council, a list of sectors

and subsectors which are deemed to be exposed to a

significant risk of carbon leakage”. Available at http://

ec.europa.eu/environment/climat/emission/pdf/

draft_dec_carbon_leakage_list16sep.pdf

Mattoo, A., A. Subramanian, D. van der Mensbrugghe and

J. He. (2009). “Reconciling climate change and trade

policy”, Working Paper No. 09-15. Peterson Institute for

International Economics, Washington, D.C.

Messerlin, P. (2010). “Climate change and trade: From mutual

destruction to mutual support”, Groupe d’Economie

Mondiale Working Paper, April 2010. Sciences Po, Paris.

Available at http://gem.sciences-po.fr.